ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -An unwanted side effect of a contractionary monetary policy is a rise in unemployment. The economic slowdown and lower production cause companies to hire fewer employees. Therefore, unemployment in the economy increases.

Detailed explanation-2: -Note that the goal of contractionary monetary policy is to decrease the rate of demand for goods and services, not to stop it. So, higher interest rates through contractionary policy can be used to dampen inflation and move the economy back to the price stability component of the dual mandate.

Detailed explanation-3: -Contractionary monetary policy is a macroeconomic tool that a central bank-in the US, that’s the Federal Reserve-uses to reduce inflation. The goal is to slow the pace of the economy by reducing the money supply, or the amount of cash and readily cashable funds circulating throughout the nation.

Detailed explanation-4: -If inflation heats up, raising interest rates or restricting the money supply are both contractionary monetary policies designed to lower inflation.

Detailed explanation-5: -What are the benefits of contractionary monetary policy? A direct benefit of contractionary monetary policy is that it strengthens government budgets. For example, when the Fed’s discount rate increases, the government earns more money from the banks that borrow funds from the Fed’s discount window.